Malagasy Republic - Third Highway Project

CIRCULATING CopY TO BE RETURNED TO REPORTS DESK DOCUMENT OF INTERNATIONAL BANK FOR RECONSTRUCTION AND DEVELOPMENT INTERNATIONAL DEVELOPMENT ASSOCIATION Not For Public Use FILE C0PY ReportNo. P-1152 REPORT AND RECOMMENDATION OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPOSED LOAN AND A PROPOSED DEVELOPMENT CREDIT BOTH TO THE MALAGASY REPUBLIC FOR A THIRD HIGHWAY PROJECT December 5, 1972 This report was prepared for official use only by the Bank Group. It may not be published, quoted or cited without Bank Group authorization. The Bank Group does not accept responsibility for the accuracy or completeness of the report.  Currency Unit Malagasy Franc (FMG) US$ 1 FMG 256 FMG 1 US$ 0.0039 FMG 1000 US$ 0.39 FMG 1,000,000 US$ 3,906 FMG 1,000,000,000 US$ 3,906,000 Fiscal Year - January 1 to December 31.  INTERNATIONAL BANK Th :L .iCCNSTEUCTION AND DEVELOPMIENT INTERNATICG;XV DEVELOPWENT ASSOCIATION REPORT AND RECCXMJENDATICN OF THE PRESIDENT TO THE EXECUTIVE DIRECTORS ON A PROPCSED LQAN AIND A PROPOSED DEVELOPMENT CREDIT BOTH TO THE MALAGASY REPUBLIC FOR A THIRD HIGHWAY PROJECT 1. I submit the following report and recommendation on a proposed loan and a proposed credit for the equivalent of US$15.0 million each, to the Malagasy Republic, to help finance a Third Highway Project. The loan would have a term of 25 years, including ten years of grace, with interest at 7-1/4% per annum. The credit would be on standard IDA terms. PART I - THE 0ONCMY 2. An economic report entitled "Recent Economic Position and Prospects of the Malagasy Republic" (Report No.AE-11a) was distributed to the Executive Directors on January 27, 1971. A major report on the economy will be preDared by an economic mission which has been in Madagascar during November 1972. Annex I presents updated basic country data collected and generated by this mission. 3. The large area of the country and its comparatively small population significantly affect its economic development problems, opportunities and prospects. Whilst the country is sparsely populated (7.4 inillion people on a land area of 590,000 square kilometers - i.e. 13 inhabitants per square kilometer), there is intense population pressure on resources in certain areas, particularly the central highlands and the south. This gives rise to important migrations of a seasonal, semi-permanent and permanent character. In particular migration to the west of the country where underutilized land is still plentiful is recurring on some scale. The geographical pattern of investment clearly must take account of this movement. 4. The Malagasy economy remains heavily dependent on France, for both financial and technical assistance. There are some 34,000 Frenchmen living on the island, playing a significant role in the economy, in education as well as industry, agriculture, and trade. Madagascar is also a member of the Franc Zone, thereby benefiting from free convertibility of its intra- zone export earnings and from overdraft facilities with the French Treasury. Madagascar's trade with countries outside the Franc Zone has been generally in balance, primarily because of coffee and vanilla exports to the U.S. 5. Madagascar's GNP in 1970 was estimated at approxim2tely $880 million, and the per capita income was about $125. The economy is basically agricultural. More than 80% of the population is rural, and agriculture accounts for roughly 30% of total GNP. About half of this production is, however, consumed on the farm; monetary income from agricultural pursuits is approximately  - 2 - 20% of total monetized income. The main prccuct for local consurmtion is rice. The main export- products are coffee, cloves, vanilla and animal products (mostly meat). 6. Between 1966 and 1971 real GON? rew at about 5%, representirg an annual increase in per capita GNP of slightly over 2% a year. In recen; years, the Government has made a strong effort to increase public secto:' investment and to create conditions for the expanston of private nvestmX . Gross fixed capital formation rose from F1S 22 billion in 196i to 36 bil-. Lo. in 1970. While detailed inormation for 1971 is not yet available, and is particularly scarce respecting private investment, there are indicatio;-.s <. there has been a continued increase in inves-;ment. The proporti,on of ui; devoted to investment increased from 13% in 1966 to more thar. 16% in 1970. During the past few years, about one half of pLblic sector investment, w:ic. represents, on average, 40% of total gross capital formation, has been financed by recurrent budget surpluses and thne rest by foreign ca-pital :-a ;. The European Development Fuind (FED) has been the major so-urce of external capital (about one half of the total) while others, principally France anca the Bank Group have provided the rest. 7. The Government has been cautious in its overall fiscal policy. Current Government revenue increased faster than monetized GDP, at an am-uai rate of 11%, in the period 1966-71. Total tax revenue now represents about 25% of monetized GDP. Likewise Central Government savings have increased continuously from 1966; in 1971, 27% of Central Government revenue was saved and covered close to the total of Government investment expenditures. There has been an overall cash surplus in the budget in four of the last eight years, and in 1970 and 1971 the surpluses were substantial. Deficits have never been large. Some deterioration is expected in 1972 and 1973 because o: the abolition of the head tax and of the cattle tax which had been recorner-ded. as a phased policy by an I1T' tax mission. These together had produced about 80% of the tax revenue of the provinces, and 12% of total tax revenue ofL the country. Accordingly, it is expected that transfers from the Central Government to the provinces will need to be increased. The a&r_rnistration is preparing several measures to reduce routine budget expernditures and increase revenues, such as abolishing free housing Lor civil servants and ixmproving the collection of direct taxes. These measures to restrain routine expenditure will be in keeping with previous Goverrment policies which have kept the real incomes of Governrrent e=rl,yee-- virtually unchangied over the last 5-6 years. The increase in the Gov-zrrnmnt's outlay on salaries has resulted from a doubling of employment in education between 1966 and 1971 and a 2.-5 per annun increase in other Central Government employment. 8. Ecternal finances have reflectec the cautious fiscal policy. In 1970, export earnings increased by 40% while imports lagged behind and the country's foreign exchange reserves almost doubled. In lg9l, imports irncreased by 25%, while exports stagnated; hoTever, foreign exchange reserves declired only slightly. They now amoAnt to $65 million, corresponding to three-and-a -half months' imports.  Xadagascarts first Five-Year Plan oeriod ended in 1968. It was .ollowed by an interim Plan for 1969-70 and by the preparation of a new Plan, the official adoption of which has, however, been delayed though its main outlines have been followed. The development strategy since the and of the lcst Plan aims at: (i) self-sufficiency in rice; (ii) diversification of expct s tirough stimulation of new exoorts (livestock, cotton, forest products) and the expansion of mining; and (iii) improvement in transport, pi-t-cularly roads and ports. There has been progress with regard to each of these objectives. 30. At the end of 1971, Miadagascarts external public debt, outstanding and disbursed, amounted to $110.7 million equivalent. France was the major creditor, accounting for 61% of the total, while debt to the Bank Group accounted for 15%. Debt service payments in 1971 amounted to $8.9 million or 3.9,% of estimated foreign exchange earnings. Although debt service is relatively low and the country is creditworthy for further lending on Bank terms, it is desirable, in view of the country's poverty and the still limited prospects for its exports, that the major proportion of external aid continue to be provided on concessional terms. PART II - BANK GROUP LENDING TO MADAGASCAR Ii. Since the newly independent Ylalagasy Republic became a member of the Bank and IDA in September 1963, Miadagascar has received five DA credits totalling $44.4 million and three Bank loans totalling $11.1 million. Four of the projects representing 50,% of the total amount have been in transport; three projects, representing about 42% of total lending, were in agriculture; tle balance is accounted for by a loan for an education project. Annex II contains a summary statement of Bank loans and IDA credits and notes on the execution of on-going projects. Project execution is generally satisfactory. Administrative delays in the preparation. of withdrawal applications, which occurred in the earlier projects, have been largely overcome. 12. The priority which the Bank Group in its lending is giving to the improvement of transport and agriculture conforms to Madagascar's development requirements and objectives. Our past and future programs in the transport ector have been geared to: (i) the provision of links between the main urban centers; (ii) the construction of penetration roads in the promising agricultural areas; (iii) the improvement of port facilities; and (iv) the strengthening of the railroad which provides a more economic means for transportation in certain areas and for certain commodities. The Tamatave port project, currently in execution, will soon provide an improved outlet for exports. Bank Group financed road construction in the central and northern regions has helped to increase all-weather land connections within the island and will with this proposed project continue to do so in the central and western regions. I expect to be able to submit to you early in FY 1974 a proposal for a railway loan.  13. In agriculture Madagascar's development policy is to keep the country self-sufficient in rice by expand-Lng production, and to diversify and increase the production of export crops;the Bank Group is as3isting the Government in the implementation of this policy with the three projects for which assistance has been provided, including the Morondava irrigation project which you approved in June. Several additional projects for genera_ agricultural development, forestry, livestock and rice productior a.e at various stages of prepara-ion and should result in Bank Group financing operations over the next two fiscal years. Also under consideration is a second project in education and a development finance company uroject. PART III - TRANSPORT IN MiADAGASCAR 14. The lack of efficient means of communication has hindered MadagascarK- economic development. Despi-e investments in recent years the transport system is still at an early stage of development and cannot yet fully serve Madagascar's needs. The northern and part of the western regio-ns have no all-weather land connections with the rest of the island; the links wit;^ the southern region are largely trails. The size of the country, the rugLe&- ness of its terrain, the dearth of road building materials and the fact thal the relatively light population tends to cluster in dense but relatively small and isolated pockets exacerbates transport problems and makes their solution very expensive. It now takes from four to six weeks to transport by la;.c goods from Tananarive, the capital, and most irnportant economic center, to Diego Suarez, the main port in the north, a distance of 1,200 km. With an all-weather road of modest standards, this travelling time could easily be reduced to a few days. 15. The state-owned railway system comprises about 900 kon, and is operated by the Reseau National des Chemins de Fer Malgaches. under the supervision of the Ministere de l'Am6nagement du Territoire. Most of the system was built prior to 1920, and does not permit speeds above 35 Ion an hour. Since the railways have enjoyed preferential treatment they have been able to show successful financial results (See paragraph 25). Technically, they are well managed, but due to organizational problems, the uneconomic tariff structure, and the lack of financial and commercial flexibility, they are ill-equipped to face increasing road competition. The railways are presently contemplating a large renewal and exDansion program for which the Bank's assistance has been requested. In this connection, a railway appraisal mission has been scheduled for early 1973. 16. Madagascar has a fairly extensive .ir transport network. Of its 63 airfields, 17 are built to all-weather standards. The rest have unpaved runways which may be closed during bad weather. Only the airports at Tananarive and Majunga can handle international jet aircraft. This network does however compensate to some extent the absence of adequate land transport.  17. Inland water transport is limited by the lack of navigable waterways. Coastal navigation is important as the only means of transport between many areas; this traffic amounted to about 300,000 tons in 1970. Recognising the importance of water transport in the country's transport system, the Bank Grolup through an IDA credit of $9.6 million made in June 1970 (Credit _No. 200-MAG) is participating in finahringThitension wok inVthe Port of'Tamiatave - the country's largest port - and provides technical assistance for management personnel and for training. 18. The highway network comprises about 32,000 km of roads consisting of a primary network of 8,500 kIn, 19,000 km of secondary roads and about 4,500 km of other roads. Road density is relatively low and is not uniform; large regions like Diego Suarez, Morondava and Fort Dauphin are not yet connected with the rest of the island by all-weather roads. With the exception of about 1,500 km of asphalt-paved primary roads constructed since 1964, road standards are generally low with alignments bad, pavements narrow and weak, and structures often obsolete. Through two past loan/credit operations res- pectively in 1966 and 1968, the Bank Group has contributed to constructing some 300 km of roads and three major bridges (see Annex II). Annual traffic growth, based on fuel consumption records, suggests an average rate of 8% per annum, about the same as the growth of the vehicle fleet. 19. The Ministere de l'Am6nagement du Territoire (Ministry) administers national roads - about 27% of the total network - and provides assistance (including personnel and equipment) to provincial and local authorities for other roads. The Government intends, within the next 18 months, to define a secondary road network and to establish a program to transfer gradually the full responsibility for the' upkeep of this'network to the- Ministry. - 20. Administration of the national highway system is generally well organized. Within the Ministry the Public Works Directorate is responsible for planning construction and maintenance of roads and relies heavily on expatriate staff; currently it has about 60 experts supplied by the French Fonds d'Aide et de Cooperation. The Government, in accord with its policy to reduce gradually dependence on expatriates, is taking measures to train nationals to fill positions currently occupied by foreigners. The Bank is assisting in this respect through an education project (Loan 510-MAG) which provides for expansion of a technical lycee to train middle-level personnel in engineering, and in road and building construction. 21. in general priority has been given by the Government to new roads serving areas with good agricultural development potential in preference to upgrading inadequate roads or building new ones which would compete with other modes of transport. Using these criteria, a highway master plan was drawn up in 1961 by the Bureau Central d'Etudes pour les Equipements d'Outre- Mer (BCEOM, France) in close cooperation with the Commissariat du Plan and the former Ministry of Public Works, called the "Plan of the Year 2000". The first phase of this plan was the period 1964-1973, during which 3,000 km of  the primary road network and 6,000 kom of the secondary roads we:e vo be reconstructed to modern paved standards. Although Ltplementat_in oG thi.- first phase of the plan has fallen short of its ambitious objec-`ves, the wo-- completed has provided some of the key links in the island's transpo v&t- work. Following the recent political changes, the Governmient is con.sider_.i revision of the highway investment program. 22. External financing for highways is proviaed largely oy t`c-e Development Fund (FED) and to a lesser extent by thca Bank Group. There :war also been some participation boy the, Governmernts of Italy and the Federal Republic of Germany who are currently helping to finance projec-s costing approximately US$8.8 million and US$16 million respectively. 23. Road construction is carried out largely by convract. The sin m-a: road contractors are subsidiaries of French firms and many of th-e s;malier contractors are also foreign. The local contracting industry has not devc- oped due to the scarcity of capital, the urnavailability of cre_i- fazii `zs and the scarcity of professional skills. The Government is consid erin .:s to encourage development of the local contracting industry0 The Dpossibil-ly of executing road projects with more labor intensive methods is also receIxv attention. 24. Expenditures on road maintenance are ins-ufficient; many iCoads poorly maintained and maintenance equipment remains under-utilized. i;g negotiations, the Government provided assurances tha-t sufficient funds wil.l be allocated annually to permit adecuate road maint'enance. The Governnlen- has also agreed to review maintenance needs and the adequacy of budgetary allocations annually with the Bank. 25. Road transport has not been permitted to compete effectively wt-i rail transport in the important Tananarive-Tamatave corridor. This has noon achieved by administrative restrictions on vehicle weight, and by deferring improvements of the road. As a result, the railways have adopted tariffs that yield a substantial financial surplus, but disregard economic consider- ations. The cost to the economy of this policy has not been qun-cified, but could be high; for instance excessive depcndence on the railways has at times caused congestion and delay. The Government's position on this question, however, is changing and consultants under Credit 90-HAG are currently investigating the feasibility of improving:. the road between Tananarive and Tamative with due consideratior to modal coordination. Also, during negotiations, the Governmenat agreed to take steps towards ratio- nalizing resource allocations in the transport sector to ensure souid development and efficient use of all transport modes, including t-he lifting of uneconomic restrictive tranisport measures. PART DT - THE PROJECT 26. A report entitled "Appraisal of a T'hird Highway Pro`ect - Malagasy Republic" (No. 23-MAG) is beinig distributed to the Executive Directors separately7 A Loan/Credit and Project Sumnary is provided in Annex III.  -7- ~27. The project was appraised in November 1971 and an updating missior visited Madagascar in September/October 1972. The project is intended to support the development of Madagascar's transport system by the detailed engineering and construction of selected priority road sections. Negotiations for the proposed Loan/Credit were held in Washington from October 24 to 27, 1972. The Malagasy delegation was led by General Andriamahazo, Ministre de l'Am6na- gement du Territoire, and included His Excellency Henri Raharijaona, Ambassador of Madagascar to the United States, Mr. Rahalison, Secretary General, Ministere de l'An6nagement du Territoire, Mr. Andriamavalona, Secretary General, Ministry of Finance, Mrs. Celine Rabevazaha, Director of Planning, Mr. Ranaivoarivelo, General Manager, Malagasy Railways, Mr. Rapiera, Director of Post and Tele- communications and Mr. Randrianasolo, Counselor, Malagasy Embassy. 28. The project (see map attached) consists of: (i) construction of approximately 417 km of primary roads, namely: Route Nationale 44: Vohidiala-Ambatondrazaka (24 km); RN-1: ' Arivoniamamo-Analavory (59 km); RN-34: Antsirabe-Betafo (21 km) Betafo-Mandoto (81 kin) Mandoto-Miandrivazo (118 km) Miandrivazo-Malaimbandy (114 km); and twelve major bridges on the Miandrivazo-Malaimbandy section. (ii) consulting services for: (a) supervision of construction under item (i); (b) detailed engineering of a further 200 km of primary roads; and (c) a review of the traffic counting system. 29. All the road sections proposed for construction pass through areas of high agricultural and livestock production or potential. The section of RN-44, currently unpaved, is already carrying heavy traffic from paddy pro- duction in the Lac Alaotra region. The section of RN-1, west of the capital, leads to an area with ranching potential in which the Bank Group is already involved through Loan 585-MAG. The sections on RN-34 include reconstruction, near Antsirabe, of a section already carrying about 600 vehicles per day and construction of a new road in the Sakeny River Valley, one of the most fertile areas of Madagascar where development has been retarded because of lack of efficient land transportation. 30. In order to prepare further road projects which may be suitable for Bank financing, consulting services are included in the project: (i) for the detailed engineering of the 200 km road section between Antisihohi and Ambanja on the Tananarive-Diego Suarez road which appears justified on the basis of feasibility studies carried out by French consultants (BCEOM) with FAC financing; and (ii) to improve the traffic counting system and thus one of the bases for rational highway planning. 31. The Ministere de l'Ame'nagement du Territoire will be responsible for the execution of the project. The Service Central Technique within the  - U - Ministry will supervise the relatively shor- stre-ches of constru;-2-'io- on r\-4 and RN-1, supported by the Laboratoire National des Travaux Publics et du Batiment. This practice has proved satisfactory unier the First and Seccr~a Highway Projects. Construction on RN-34, however, is a large undertaking. and would be beyond the supervision capacity of the Government servtcesi andr consequently it will be supervised by consultants under terms and cordti-ions satisfactory to the Bank. 32. The total cost of the project includirg taxe s of $5S.3 . _ _oA estirnated at $43.9 million equivalent, with a for -ign exchange conifonent of .j' million (66%). The Bank loan and IDA credit totalling $30.0 million would finance the total foreign component and approximately US$1 million equlval6t- of the local currency costs of the project, and would cover 80% of the total project cost, net of taxes. The Govermnent will finance the remainring local costs estimated at $13.9 million equivalent from 'oudgetary sources. Disbursemen _ will be made first from the credit account, and then from the Joan. Disbuemerl-7. from each account will be made against 69% of expenditures on road constructton and the actual foreign costs of consultants. 33. The economic rate of return for the project as a whole averages 16% and varies from 15% to 29% for particular road sections. Bene_'i`-s would arise from savings in operating costs of existing and induced traff-ic, fron diverted traffic, and from the anticipated increase in agricultural producticr.. There will also be maintenance cost savings on part of the project roads, although there will also be addi-tional maintenance costs on part of RN-34 where the road at the moment is no more than a simple track. The e_'fect on the rate of return of varying parameters has been tested and even under the most adverse assumptions the investment is still distinctly advantageous. 34. Construction contracts wirll be awarded on the basLs of internationa_ competitive bidding in accordance with the normal procedures of the Sank Group. To take advantage of possible econor,.ies of scale through the use of larger contractors, and at the same time to allow small firms to compete, construction works will, for contract purposes, be divided int;o two packages of contrac-s, one including 2 jobs and the other 5 jobs, the first package totalzing approximately US$8.5 million and the second US$25,4 million. The eatimated value of the individual jobs ranges from abou-t U;$1.0 million to $ 4.8 million. The works in each package will be bid concurrently; bids may be submitted on single jobs, on several, or on entire packages. Contracts will be awarded on the basis of the lowest overall evaluated bi-ds. The es-imated construction period is four years. Contractors have been prequalified and the Government intends to award contracts for work to start when thle dry season begins, i.e. about April.  -9- PART V - LEGAL INSTRUMENTS AND AUTHORITY 35. The draft Loan Agreement between the Malagasy Republic and the Bank, the draft Development Credit Agreement between the Malagasy Republic and the Association, the Report of the Committee provided for in Article III, Section 4 (iii) of the Articles of Agreement of the Bank, the Recommendation of the Committee provided for in Article V, Section 1 (d) of the Association and the text of a resolution approving the proposed loan and credit are being distributed to the Executive Directors separately. 36. The draft Loan and Credit Agreements conform to the normal pattern of agreements for highway projects. 37. I am satisfied that the proposed Loan and Development Credit would comply with the Articles of Agreement of the Bank and of the Association. PART VI - RECOMMENDATION 38. I recommend that the Executive Directors approve the proposed loan and credit. Robert S. McNamara President Attachments Washington, D.C. December 5, 1972   COUNTRY DATA - MALAGASY REPUBLIC AREA 2